Frequently Asked Questions

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What is an Appraisal?

An appraisal is the evaluation of a property’s value for financing or other purposes. In this article, we will cover appraisals for mortgage financing purposes. There are at least three methods that appraisers use to evaluate a property value:

The Sales Comparison method

The Cost Approach

The Income Approach

The most common approach used for residential mortgages is the Sales Comparison method. In this method, the appraiser compares the sales prices, features etc. of homes in the same immediate geographical area and similar size to the subject property and then makes adjustments to those values to determine the appraised value of the subject property.

Why did my previous Lender not ask for an Appraisal?

All mortgage lenders will always ask for an appraisal. There are different methods of completing appraisals. Here are some examples:

Physical Appraisals – A licensed appraiser will physically inspect the home. This is paid for by the borrower./li>

Automatic Value Method (AVM) – A lender has enough data to be able to determine the value of the property without requiring a physical appraisal. This is often done by mortgage insurers such as CMHC, Genworth or Canada Guaranty. Mortgage insurers will always try the AVM method first, but if they have any doubts about the property or the value of the property, they will need a physical, full appraisal. An AVM appraisal is almost always paid for by the mortgage insurer or lender.

Drive-by Appraisal – The mortgage might be small compared to the value of the property and the lender has sufficient information on the home, except for a few minor details. The borrower typically pays for a Drive-by appraisal.

Whenever a mortgage is not insured or back-insured with a mortgage insurer, the lender will always require an appraisal.

So, your previous lender definitely did an appraisal, but it was most likely an AVM appraisal and was thus done in the background with no cost to the borrower.

Why do Banks Need Appraisals?

Appraisals are essential and protect investors and borrowers in many ways. To mention a few:

Appraisals protect the real estate market and ensure that sellers and buyers cannot take part in price collusion.

Appraisals go a long way to limit fraud and avoid “straw” financing. Straw financing happens when fictitious properties, that don’t exist, are financed for fraudulent purposes.

To establish the market value of the property. This is especially important in an overvalued or undervalued real estate market. This protects the interest of the bank to make sure they don’t over finance properties.

To establish the proper and legal profile of a property. The condition of the property and geographical area that the property is located in.

Appraisals can be annoying but are an essential part of the real estate buying process that we should preserve. It is part of what saved Canada from the 2008 real estate crash.

When should an Appraisal be Ordered?

An appraisal should be ordered as soon as possible after a mortgage has been approved. This is important since the appraised value of the property should be captured in the exact market conditions that the property was purchased. It is especially important in a declining market since the consequences of an under-appraised property can be catastrophic to the borrower.

For a property purchase, the appraisal should be ordered and completed within the Condition of Finance (COF) Period. Having the appraisal completed inside the COF period should be the primary goal of the COF condition on the Agreement of Purchase & Sale. The best way that a purchaser can protect him/herself if they purchased in a “bidding war” is to ensure their purchased property is appraised within the COF period. This will ensure their purchase price is not higher than the appraised value of the property so that their financing is not affected.

How could an Appraisal Affect Mortgage Financing?

Lenders always finance on the lower of the purchase price or the appraised value of a property. The consequences of an under-appraised property are as follows:

Purchase – If the appraised value of the house is below the purchase value of the property, the purchaser has to come up with the down payment PLUS the difference between the purchase price and the appraised value from their own resources. If the borrower has a large enough down payment the impact could be minimal, however, if a borrower only has a minimum down payment and their resources are limited, the consequences can be catastrophic if they have waived their COF and can no longer back out of the purchase.

Refinance/Switch – For a refinance, a property is under-appraised if the appraised value of the property is lower than the borrower’s perceived value of the subject property. This could limit the amount of equity that a borrower has access to, or limit the finance options that a borrower might have available to him/her. If a borrower planned to use the equity in the subject property for the down payment of a different property or to pay off debts, the consequences could also be dramatic.

Who can Appraise a Property?

Only licensed appraisers, accredited by the proposed lender of the subject property can carry out legally binding appraisals. Although realtors and mortgage brokers might have opinions of value, they are not legally binding values and cannot be used for mortgage financing purposes.

Who orders the appraisal?

All appraisals have to be ordered by a third-party, arm’s length individual. Thus, borrowers cannot order their own appraisals. The appraisal is usually ordered by the mortgage broker or directly by the bank from a list of licensed, lender approved and accredited appraisers.

Who pays for the Appraisal?

The borrower pays for the cost of the appraisal. In some cases, a lender may reimburse the borrower for the cost of the appraisal after the mortgage has closed.

What does an Appraisal Cost?

The cost of a residential appraisal varies between appraisers, appraisal services, property values and lender types. The typical cost for an appraisal ranges between $250 to $1,000. Appraisals for alternate lenders are more expensive than for AAA lenders and appraisals for luxury homes are also significantly more expensive than for lower value homes. Some lenders might ask for two appraisals if a property’s purchase price or estimated value is above $1M.

How do I Pay for the Appraisal?

The method of payment depends on the appraisal company and how they accept payments. The borrower pays the appraiser directly and most appraisers or appraisal services will accept email transfer, or credit cards. It is best to check with the appraiser directly to determine acceptable payment methods. The borrower should insist on getting a receipt from the appraiser once paid. It is very important to note that the appraiser will not proceed with the appraisal process unless they have been paid in full. There are no refunds for appraisals that the borrower might deem to be unsatisfactory.

Can I get a Copy of my Appraisal?

If the mortgage brokerage gets a copy of the appraisal report, the brokerage can give a copy of the document to the borrower AFTER the mortgage has funded. The appraisal report is protected by copyright. It is illegal for the brokerage to provide a borrower with a copy of the appraisal before the mortgage has funded or if the mortgage does not fund at all.

Can I use an Existing Appraisal?

Although helpful to establish the subject property’s profile, an existing appraisal or an appraisal from a different lender cannot be used for current financing. Appraisals are only valid for 90 days and only applicable to the lender that mandated the appraisal.

Can I get a Second Opinion on an Unsatisfactory Appraisal?

Once an appraisal has been transmitted to a lender it cannot be withdrawn from the lender.

Unless required by the lender, lenders will never consider two appraisals for the same property.

Appraisers send appraisal reports directly to the lender with a copy to the mortgage broker.

What happens if an appraisal was completed and the property was either under-appraised or the borrower is not satisfied with the appraisal? Can a second opinion be asked from a different appraiser?

Yes – however, a second appraisal will need to be ordered from a different appraiser, at full cost to the borrower and the mortgage will need to be placed with a different lender. Placing the mortgage with a different lender might affect the interest rate, mortgage type etc.

No – Not if the borrower is not prepared to pay for a second appraisal, nor if the borrower is not prepared to move their mortgage to a different lender.

Can I Appeal the Value of an Appraisal?

The short answer is “yes”, however, appraisers only, on very rare occasions might make minor adjustments to an appraisal report. Thus, in reality, the answer is actually “No”. Thus, if a borrower is not satisfied with an appraisal, the mortgage will have to be moved to a new lender and a new appraisal will have to be ordered at the cost of the borrower.

Who does the Appraiser Work for?

The vast majority of appraisers are independent and licensed. Appraisers have to be accredited by a specific lender, but their mandate is to provide an independent evaluation of a subject property.

Do Appraisals Always Come in Lower than the Actual Value of the Property?

The simple answer is “no” since appraisers use actual data from actual property sales.

How long does the Appraisal Process take?

Once the appraisal has accepted payment from the borrower it usually takes between 3 to 5 banking days for the appraiser to issue the appraisal report to the lender. The actual, appraisal inspection itself will take less than 30 minutes in most cases.

Does it matter what my House Looks like for the Appraisal Inspection?

Although the appraisal largely depends on the subject property’s features, location, size etc, it definitely does depend on the state of the home at the time of the appraisal. Appraisers have to report on everything they see at the property. Thus, for the borrower to get the best appraisal, the property should be in good repair and tidy.

How does the Appraisal Process Work?

The process for a physical appraisal starts once the mortgage on the subject property has been approved and the lender or mortgage broker has ordered the appraisal. The mortgage process is slightly different for a purchase, refinance or switch. A mortgage Switch happens when a mortgage is moved from one lender to another, at the maturity date subject to specific terms and conditions. Here are the typical processes for each type of mortgage transaction:

Purchase

Mortgage is approved.

Mortgage broker obtains consent from the borrower to order the appraisal.

Mortgage broker/lender orders appraisal.

Appraiser requests payment from the borrower.

Appraiser accepts payment from borrower.

Apppraiser contacts LISTING realtor to gain access to the property and to set an appointment to enter the property.

Appraiser enters the property to take measurements, pictures etc.

Appraiser does research and prepares the appraisal report.

Appraiser releases the appraisal report to the lender.

Lender reviews appraisal report and either accepts, rejects or requests more information from the mortgage broker or appraiser.

Refinance

Mortgage is approved.

Mortgage broker obtains consent from the borrower to order the appraisal.

Mortgage broker/lender orders appraisal.

Appraiser requests payment from the borrower.

Appraiser accepts payment from borrower.

Appraiser contacts the borrower to gain access to the property and to set an appointment to enter the property.

Appraiser enters the property to take measurements, pictures etc.

Appraiser does research and prepares the appraisal report.

Appraiser releases the appraisal report to the lender.

Lender reviews appraisal report and either accepts, rejects or requests more information from the mortgage broker or appraiser.

Switch

Mortgage is approved.

Mortgage broker obtains consent from the borrower to order the appraisal.

Mortgage broker/lender orders appraisal.

Lender pays for the appraisal (Not always).

Appraiser contacts the borrower to gain access to the property and to set an appointment to enter the property.

Appraiser enters the property to take measurements, pictures etc.

Appraiser does research and prepares the appraisal report.

Appraiser releases the appraisal report to the lender.

Lender reviews appraisal report and either accepts, rejects or requests more information from the mortgage broker or appraiser.

The above processes are subject to change, can change from lender to lender and might not be applicable to all borrowers and terms and conditions apply.

Disclaimer

The above comments are made to help the borrower understand the appraisal process and are based on Mortgage Allies’ experience and are not specific to any appraiser or appraisal company or service. Comments and processes may vary between lenders, properties, appraisers, mortgage insurers, mortgage rules etc. and are subject to terms and conditions and change without warning.